The issues to watch in the 2017 Climate Policy Review

Date December 2016

Expectations are high for the Federal Government's 2017 Climate Policy Review as an opportunity for a comprehensive assessment of the effectiveness of the current suite of climate and energy policies. For business, the 2017 Review must facilitate the development of policies that provide clarity and the level of predictability essential to stimulate investment in a low carbon future.

Today the Department of the Environment and Energy released the Terms of Reference for the Review.

To follow is the Executive Summary of Energetics' report to the Government which was submitted at the time the Terms of Reference were being set. Our submission considers the convergence of a number of issues. We have examined the impact of climate policy on energy generation and security of supply; energy productivity and the rate of decarbonisation; and the opportunities for our land sector into the future as Australia participates in a growing international carbon offsets market. We also argue strongly in favour of bringing forward action on climate change as both a fiscally responsible approach and to reverse the current upward trend in national emissions.

As energy and carbon management advisers across all sectors of the Australian economy, Energetics has observed a number of consistent views from business leaders about the risks and opportunities associated with climate action and the need to meet our international obligations.

These are:• Acceptance that there will be a future price on carbon. Many businesses have applied an internal carbon price to large, long term capital investment decisions for some years.• Desire for policy stability.• Interest in renewable energy, from procuring supply, investing in on-site generation and investigating energy storage options, through to participation in buying groups.• Concerns for the outlook for energy costs and the reliability of supply.• An understanding that coal fired generation must decrease; particularly where sourced from brown coal.• Anticipation that the baselines under the Safeguard Mechanism will decline to drive deeper emissions reductions across the economy.

Our recommendations:

The transformation of Australia’s energy mix needs to be actively managed

Achieving the emissions reduction target of 28% relative to 2005 by 2030 will disrupt the electricity generation mix. Brown coal generated power will need to be substituted with either natural gas powered generation or additional renewable energy, or a combination of both.

The two principal challenges associated with these substitution options are the current severe natural gas supply constraints in the south eastern states, and the inability of our transmission and distribution systems to reliably manage increasing intermittent supply from renewables.

Improving energy productivity is critical

Energetics’ submission discusses the impact of different energy productivity targets in view of the anticipated growth in GDP through to 2030 of 54%. For example, our modelling shows that Australia can achieve the 28% emissions reduction target with the current national target of a 40% improvement in energy productivity, however it will result in a major disruption to the generation mix given the growing demand for energy in an expanding economy.

As outlined the preceding point, the Review will need to consider the support needed to achieve a managed, smooth transition to an energy mix with a high level of renewables penetration.

Carbon credits: need to minimise costs locally and support the land sector to develop ACCUs for future sale into international carbon market

The price of ACCUs may approach $65 towards the end of the next decade, reflecting both domestic and international supply and demand for carbon credits. With such a high cost associated with emissions reductions, abatement activity should be brought forward to minimise the economic impact over the back half of the next decade.

Conversely there is a significant economic opportunity associated with the generation of carbon credits. By 2030 Australia could sequester in the land sector some 2 billion tonnes of carbon in excess of its domestic requirements. The actual figure will depend upon the international demand for offsets and their traded price. Creation of offsets from the land sector could see a transfer of funds from Australian urban areas to regional areas, and generation of carbon offsets for export.

The 2017 Review should therefore address international linkages and pathways for abatement in the land sector to generate wealth for the regional areas of Australia.

Emissions reduction measures should be brought forward

There is a clear and compelling case for bringing forward abatement measures. Firstly, as emissions are currently rising in the economy, this trend needs to be reversed. Secondly, Energetics’ modelling demonstrates the economic value of early action: one tonne of abatement implemented before 2020 displaces over three tonnes of emissions reductions needed over 2020 to 2030.

The Review is an opportunity to reassess program timelines, deployment costs and impacts in order to drive emissions reduction measures before 2020. To this end, Energetics has already conducted an analysis of abatement that could be brought forward. This work can be found inTable 1 of our report for the Department of the Environment which was released in May 2016. It is our intention to update this information as part of our formal submission to the 2017 Review.

You can read our report to the Government on the Terms of Reference in full, via this link.